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      • « Look Out Below! | Main | What’s Nortel’s Investment Thesis? »

      Is Nortel Ripe for a Takeover?

      By Mark Evans | March 4, 2008

      Here’s a crazy thought: Nortel is ripe for a takeover - probably by one of those shark-like private equity investors, provided they’re not spooked by the telecom equipment market and the volatile credit environment.

      Here’s why:

      Nortel has a market capitalization of $3.52-billion and cash of $3.53-billion. This means someone could purchase Nortel, and then cover the cost of acquisition by using Nortel’s cash. This is obviously a simplistic scenario but it does put the spotlight on Nortel’s financial struggles and how investors have soured on the company.

      (Update: My math is wrong because I failed to take into account Nortel’s debt of $4.5-billion. So, someone looking to buy Nortel would have to cough up $4.4-billion, or a price-to-sales multiple of 0.44:1)

      If the numbers sorta, kinda look attractive for a potential suitor, what would a hard-nosed buyer do with Nortel to really boost ROI? Perhaps it would sell non-core businesses, close operations that didn’t make sense and eliminate thousands of more jobs.

      That would leave Nortel as a much smaller and, hopefully, profitable entity that could then be sold in a few years for a hefty profit.

      So, let’s run a poll to get a lay of the land.

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      Topics: M&A, Rivals, Stock |

      Viewing 13 Comments

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        At the present time, a buy out or merger of Nortel would be very difficult for any party. In terms of looking at a buy out, the Buyer would have to adjust Nortel's long term assets on the balance sheet, pay off bond holders, assume pension liabilities, assume liability for any future law suits, pay out some ugly parachute packages to Nortel's management, and deal with the fall out int he Canadian Press. Note that none of these points even deals with the central problem of fixing Nortel itself products, distribution, head count, etc.). Nortel has all of the cancers that a private equity firm runs from.

        It would be even more difficult to find a potential merger partner stupid enough to take on Nortel a ta time when the company is collapsing right in front if its competitors eyes. Nortel is losing customers and key employees to its competitors, so it really has nothing valuable to offer. It does not cost Erriccson, Nokia, Cisco, & Huawei, anything to watch Nortel collapse and hemorhage customers and key employees. Why would they spend money to take over Nortel's financial and legal problems (for instance, Cisco has no pension liabilities) in a move that would dilutive to their stock? Nortel's competitors already know that Nortel is sales numbers are shrinking and that it has very attractive margins and a bloated head count. Why would any competitor take on Nortel's difficult problems, bloated structure poor management, and an ugly PR fight with the Canadian Government and press.

        Nortel would literally have to be a zero dollar acquisition before it stopped smelling like a 30 day old dead fish.
        • ^
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        Protosphere: You have been right about Nortel for a long time now. I hope you have been shorting the stock all along.
        • ^
        • v
        The only way people leave nortel without a package is if they quit.
        Some can afford to Quit.
        Others cannot.
        These are the facts.
        • ^
        • v
        I smell possible government bailout of Nortel and more loan guarantees. With a slowing global economy, the Canadian government could keep it afloat with more bond sales.
        • ^
        • v
        Good points
        just I noticed that Canada likes AirCanada story
        Get rid off of shareholders, change ownership, restructure under BK laws and start again.
        Canadian governments love that!
        There is not much sense to pour more $$ into a broken ship taking on water! /losing money fast!/
        How much NT lost in last few years?
        They arranged $2 bill +2 Bill financing
        They sold manuf. to Flex for $700 mill
        They sold UMTSfor $300 mill
        They sold HQ for around $100Mill
        They sold assets and investments
        They diluted stock 20%
        WTF they are using money for? Bonuses and high salaries?
        Golden Parachutes for anyone leaving?
        Guess what. The last 12 months will be just ugly!
        There is not enough Golden Parachutes for every one!
        Some will jump out the plane without benefits.
        The first are the best.
        • ^
        • v
        Yes, without benefits. My friend is one of those who left this broken and disjointed company. He could not stand working for managers, who sold purpose is to frustrate their employees into quiting. He kept saying to me that the problem is the frontline managers, the so called legacy folks,and that they are incompentent when it comes to managing the new VOIP tecnology. Seems to me that they are not being held accountable. I believe that if this company gets bought, they first thing that will happen is that these legacy folks will be let go.
        • ^
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        Business buyouts are usually based on 2 to 3.5X earnings, not sales..... forget revenues/sales, they make no money... i.e. who pays money to lose money....

        Since no earnings, no sale, simple as that.

        Now what is left they divest is all they have left, what will they have left thereafter, and to who will they sell is all that remains as far as i can see? dire...
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        would need an aggressive takeover firm with a hostile bid. total debt is about 6 billion. annual revenue is 10 billion. they would be expected to pay a 20% premium. minimum bid would be 11 or 12 billion.

        outstanding shares are fragmented across a lot of small investors and retirement funds. with the stock so low, nobody will sell unless they want a huge loss in their portfolio.

        the shareholder lawsuit is being looked into again as the stock has gone down 75%. unless this is over nobody will take this liability. if the mutual funds start getting out then its a sign they are getting out.

        if it is taken over then feel sorry for the employees as it will be a bloodbath. whoever survives has no guarantee as the employment meter with the new company will be reset to 0 i.e. no bail out package.
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        From Nortel Investor Relations ..... Analyst Coverage .... or ....SUICIDE WATCH TEAM ....


        American Technology Research
        Mark McKechnie
        415-490-3920

        Arete Research Services LLP
        Richard Kramer
        +44 (0) 20 7959 1300

        Argus Research Corp.
        Jim Kelleher
        212-425-7500

        Banc of America Securities LLC
        Tim Long
        212-847-5506

        Bear, Stearns & Co.
        Phil Cusick
        212-272-9078

        BMO Nesbitt Burns
        Paras Bhargava
        416-359-6941

        Charter Equity Research
        Edward Snyder
        415-931-9955

        Credit Suisse
        Paul Silverstein
        212-325-5290

        CreditSights
        Ping Zhao
        212-340-3851

        Deutsche Bank North America
        Brian T. Modoff
        415-617-4237

        Dresdner Kleinwort Wasserstein
        Per Lindberg
        41-01-267-1666

        Genuity Capital Markets
        David Hodgson
        416-687-5342

        Goldman Sachs & Co.
        Brantley Thompson
        212-902-9823

        J.P. Morgan
        Ehud A. Gelblum
        212-622-6457

        Jefferies & Co.
        George C. Notter
        415-229-1522

        Kintisheff Research
        Tsvetan Kintisheff
        35-92-980-2044

        Lehman Brothers
        Inder Singh
        212-526-9085

        Merrill Lynch
        Vivek Arya
        212-449-2082

        Merriman Curhan Ford & Co.
        Tim Savageaux
        415-262-1383

        Morgan Stanley
        Scott Coleman
        212-761-6055

        Oppenheimer & Co. Inc.
        Ittai Kidron
        212-667-6292

        Pacific Crest Securities
        Tim Daubenspeck
        503-727-0634

        RBC Capital Markets (US)
        Mark Sue
        212-428-6491

        Robert W. Baird & Co., Inc.
        Kenneth W. Muth
        414-765-3773

        Sanford C. Bernstein & Co., LLC
        Paul Sagawa
        212-407-5825

        Scotia Capital
        Gus Papageorgiou
        416-863-7552

        Seb Enskilda
        Mats Nystrom
        46-8-522-29550

        TD Newcrest
        Chris Umiastowski
        416-983-3599

        Thomas Weisel Partners
        Hasan Imam
        212-271-3698

        UBS (US)
        Nikos Theodosopoulos
        212-713-3286
        • ^
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        -has the 14.5% of their equity been paid out to the defrauded yet?
        -their largest asset is an expiring tax credit, was 4B, should be around 3B now...
        -they also have the largest pension deficit in Canada to contend with
        -cutting further jobs is costly in severance
        -we witness a death spiral linear reduction in sales to earnings
        -are numbers reliable enough to know what anyone is really buying
        -how hard would management fight to keep its cash cow
        -does anyone know how their product groups are performing or where to focus
        -in the absence of turnaround and given consolidations by peers, can they even compete later
        -from o$4B cash in 2004, to under $2B in Q206, to now 3.5B after selling $4B in B3 rated Nortel paper, manufacturing, headquarters, UMTS, or anything not nailed down and still losing money, who in their right mind would remotley look at them.

        I think brokerage houses burned the midnight oil to arrange a hostile take over when it was trading at around 5 bucks a few years ago after the fraud was exposed with no takers, and wisely so it seems, let alone now.

        Nortel trades higher with more woes than last nearing insolvency a few years ago due to rate of decline. Why didn't anyone buy them then, at 43 cents let alone now at 75 with so many left holding the bag with this bloated stock. Bloated because they have a negative trailing P/E if there were such a thing, that's minus -27X P/E last I looked...? Price to sales is one thing but Price to earning (P/E) is more important as anyone can pay customers to take their product to look like a player for support. It is how much they earn that matters, and they just continue to burn big bucks. Tricky claiming improved margins on lower sales hiding less earnings. They are always tricky though in how they like to present or hide numbers, even after one of the largest fraud settlements. They are just sure to do everything legally now albeit protected under safe harbor should they error and I always see them revise overstating, never under, these struggling hype and loophole artists.

        Buying revenues like BSNL /PEC lost money. Personally. I don't trust their numbers after ultimatum fraud settlement accompanying mega revisions they downplayed to double, calling 20 bucks buying opportunity, promoting than firing criminally charged pals, etc.... Isn't there a matter of customer ethics and morals when dealing with a company like this or is it factored into the share price., one that perks only from what they claim to make new lows...Who will do business with them. All sins forgiven?

        Even restructured alleviating further burden there is no guarantee of success in an increasingly competitive landscape others lead. They are too far behind to ever catch up.

        Even they claimed they have about a year of cash left again, reiterating what Owens said a few years ago before selling UMTS, getting Flextronics money, and printing a whopping $4 billion in Nortel B3 rated paper where bonds circumventing listing their largest pension deficit than as a mere footnote, a loophole since closed, where they went off to reward printing dilutive notes. It is so endless,

        Perhaps as a much, much smaller company they will only lose less because they will also sell a lot less, like in a linear death spiral they just can not shake.

        Psychiatrist, I do not know where you are getting your fabricated numbers from or what your intent is but they are grossly misleading to a multiple. It is insane to claim over double what this tanking dog would be worth in a wildly speculative buy out. May I suggest that your self imposed client you stalk has been consistently correct over the years and you antagonistically wrong, unethically pumping this turd, and in greater need of what your challenged ID implies, 10 billion, ya rite... here, pull my finger.

        This company is toast and I an convinced headed to inevitable insolvency / liquidity crisis /Chapter 11... with no takers.... and I also strongly question restructuring logistics.
        • ^
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        Mark

        Nortel's current market cap is only accounting for approx 437 m shares outstanding, this does not take into consideration the additional 62 million shares that will be added to the total float, then there are the convertables designed to be converted at $32.

        So now we get Nortel's true market cap at approximately $4.07 billion + $4.5 billion of debt for a total of $8.57 billion, and this does not count the usual premium of about 25 percent that goes with making a buyout offer.

        So in reality anyone interested in buyiing Nortel is looking at a price tag of over $10 billion, of coarse there is $3..5 b in cash, however Nortel does also have about $1.2 b in contractual cash obligations over the next 12 months.
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        Cash, yes. But debt, too. The cash pile is not as big as it seems.
        • ^
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        Mike Z failed. His plan did not work in the first year and his plan is a total failure today.
        No success in gaining 20% in respected market segments, selling UMTS which shows high growth in 2008, and his 4G plans are delayed. I understand KG JV wasn't performing last quarter either. R&D under good management would be the pride of NT. Now, $2 bill R&D is killing $3.5 bill market company! oooofff Did I hear 2 years ago that Mike wanted restructure R&D?
        In a free country Shareholders would decide what's next. In Canada AirCanada scenario is very popular, Mike likes the AirCanada restructuring story too/links available/
        Shareholders lost all, planes are still flying under changed ownership.
       
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